Goodwill


Changes in Goodwill

The changes in the carrying amount of goodwill, as well as gross amounts and accumulated impairment losses of goodwill, for the years ended December 31, 2012, and 2011, are shown below by cash-generating units (“CGU”). Following the re-organization of reportable business segments in the fourth quarter 2012 (for details, please refer to Note 05 “Business Segments and Related Information”), the Group’s former primary CGUs AM and PWM have been merged into one single CGU AWM. In addition, the former Corporate Division and primary CGU CI became part of the newly reportable NCOU Corporate Division, which comprises two separate CGUs labeled as Wholesale Assets and Operating Assets.

Goodwill allocated to cash-generating units

in € m.

Corporate Banking & Securities

Global Transaction Banking

Asset & Wealth Management

Private & Business Clients

Non-Core Operations Unit1

Others

Total

1

Includes primary CGUs NCOU Wholesale Assets and NCOU Operating Assets.

2

Impairment losses of goodwill are recorded as impairment of intangible assets in the income statement.

Balance as of January 1, 2011

3,332

487

3,724

3,025

194

10,762

Goodwill acquired during the year

25

25

Purchase accounting adjustments

(11)

45

34

Transfers

44

(44)

Reclassification from (to) 'held for sale'

(4)

(5)

(9)

Goodwill related to dispositions without being classified as 'held for sale'

Impairment losses2

Exchange rate changes/other

81

8

68

1

3

161

Balance as of December 31, 2011

3,453

440

3,817

3,066

197

10,973

Gross amount of goodwill

3,453

440

3,817

3,066

230

692

11,698

Accumulated impairment losses

(230)

(495)

(725)

Balance as of January 1, 2012

3,453

440

3,817

3,066

197

10,973

Goodwill acquired during the year

Purchase accounting adjustments

Transfers

(279)

189

(331)

421

Reclassification from (to) 'held for sale'

(1)

(1)

(2)

Goodwill related to dispositions without being classified as 'held for sale'

(1)

(1)

Impairment losses2

(1,174)

(421)

(1,595)

Exchange rate changes/other

(46)

(7)

(26)

1

(78)

Balance as of December 31, 2012

1,953

432

3,979

2,736

197

9,297

Gross amount of goodwill

3,127

432

3,979

2,736

651

684

11,609

Accumulated impairment losses

(1,174)

(651)

(487)

(2,312)

In addition to the primary CGUs, the segments CB&S and NCOU carry goodwill resulting from the acquisition of nonintegrated investments which are not allocated to the respective segments’ primary CGUs. Such goodwill is summarized as “Others” in the table above. The nonintegrated investments in the NCOU consist of Maher Terminals LLC and Maher Terminals of Canada Corp.

In 2012, goodwill changes mainly included impairments of € (1,595) million recorded in the fourth quarter as a result of the annual goodwill impairment test conducted under the organizational structures both prior to as well as post re-segmentation (for details, please refer to the following section “Goodwill Impairment Test”). In the course of the re-segmentation, a number of businesses were transferred to AWM and to the two NCOU CGUs. Accordingly, goodwill of € 182 million was reallocated from CB&S to AWM (transfer of the ETF business). Prior to the NCOU impairment, goodwill of € 369 million had been reallocated to Wholesale Assets (€ 97 million from CB&S and € 272 million from PBC) and € 52 million to Operating Assets (from PBC). Furthermore, upon the sale of Postbank’s Asset Management business to the DWS Group in the third quarter 2012, goodwill of € 7 million was transferred from PBC to AWM.

In 2011, additions to goodwill of € 25 million related to the step-acquisition of the outstanding interests in Deutsche UFG Capital Management in November 2011. Purchase accounting adjustments recorded against goodwill in 2011 amounted to a net € 34 million, mainly from refinements of € 45 million in connection with the finalization of the acquisition accounting for Deutsche Postbank AG (“Postbank”; PBC) and € (11) million from the conclusion of a contingent purchase consideration payment related to the full acquisition of Deutsche Bank HedgeWorks (GTB) in 2008. With the change in management responsibility for the former Capital Markets Sales business unit in the third quarter 2011 (see Note 05 “Business Segments and Related Information”), goodwill of € 44 million related to this business was transferred from GTB to CB&S.

Goodwill Impairment Test

For the purposes of impairment testing, goodwill acquired in a business combination is allocated to CGUs. On the basis as described in Note 01 “Significant Accounting Policies”, the Group’s primary CGUs are as outlined above. “Other” goodwill is tested individually for impairment on the level of each of the nonintegrated investments. Goodwill is tested for impairment annually in the fourth quarter by comparing the recoverable amount of each goodwill carrying CGU with its carrying amount. In addition, in accordance with IAS 36, the Group tests goodwill whenever a triggering event is identified. The recoverable amount is the higher of a CGU’s fair value less costs to sell and its value in use.

The carrying amount of a primary CGU is derived using a capital allocation model. The allocation uses the Group’s total equity at the date of valuation. Total equity is adjusted for specific effects related to nonintegrated investments, which are tested separately for impairment as outlined above, and for an add-on adjustment for goodwill attributable to noncontrolling interests. This total carrying amount is allocated to the primary CGUs in a two-step process. In the first step, total equity that is readily identifiable is allocated to the respective individual CGUs. This includes goodwill (plus the add-on adjustment for noncontrolling interests), unamortized other intangible assets as well as certain unrealized net gains and losses recorded directly in equity and noncontrolling interests. In the second step, the remaining balance of the total carrying amount is allocated across the CGUs based on the CGU’s share of risk-weighted assets and certain capital deduction items relative to the Group (each is adjusted for items pertaining to nonintegrated investments). The carrying amount for nonintegrated investments is determined on the basis of their respective equity.

As a result of the Group’s re-segmentation during the fourth quarter 2012 (see Note 05
“Business Segments and Related Information – Business Segments” for details), the annual impairment test had to be conducted both in the structure prior to re-segmentation (“old structure”) and post re-segmentation (“new structure”).

The annual goodwill impairment tests in 2012 resulted in goodwill impairments totaling € 1,595 million, consisting of € 1,174 million in the CGU CB&S under the old structure and of € 421 million in the CGUs Wholesale Assets (€ 369 million) and Operating Assets (€ 52 million) within the Corporate Division NCOU under the new structure.

Sensitivity of impairment in CB&S (old structure) to certain key assumptions

in € bn.

Goodwill impairment

Recorded impairment loss

1.2

Discount rate (post tax)

 

Adverse Change (+25 basis points)

2.4

Positive Change (–25 basis points)

no impairment

Long term growth rates

 

Adverse Change (–25 basis points)

1.5

Positive Change (+25 basis points)

0.8

Projected future earnings

 

Adverse Change (–5 %)

3.3

Positive Change (+5 %)

no impairment

The impairment in CB&S (old structure) was mainly due to an increase in the discount rate, lower earnings projections as a result of a muted market outlook and certain extraordinary items expected in the short to medium term, leading to more conservative revenue growth assumptions, partially offset by planned cost savings. The impairment was determined under the value in use concept using a discounted cash flow (“DCF”) model employing a pre-tax discount rate of 15.0 %, which was determined implicitly based on a post-tax rate of 11.1 %. As CB&S under the old structure included assets subsequently allocated to the CGU NCOU Wholesale Assets, the description of key assumptions, management’s approach to determining the values assigned to key assumptions as well as the uncertainty associated with key assumptions and potential events/circumstances that could have a negative effect mentioned in the below table for NCOU Wholesale Assets, also apply to CB&S under the old structure. Similarly, the key assumptions for all other primary CGUs under the old structure can be obtained from the key assumptions table for CGUs under the new structure and taking re-segmentation into consideration.

After the impairment test in the old structure, goodwill was reallocated to the CGUs under the new structure applying the concept of relative values for those groups that were identified as businesses in line with IFRS 3. The impairments in the CGUs Wholesale Assets and Operating Assets within the Corporate Division NCOU (new structure) occurred immediately and resulted from overall negative earnings projections as part of the Group’s stated objective of accelerated de-risking of non-core activities. Both impairments were determined under the value in use concept using a DCF model and reflect key assumptions as mentioned below under “key assumptions and sensitivities”. Management believes that no reasonable possible changes in key assumptions would have materially impacted the impairments of goodwill in NCOU Wholesale Assets and Operating Assets under the new structure.

The annual goodwill impairment tests in 2011 and 2010 did not result in an impairment loss of goodwill of the Group’s primary CGUs as the recoverable amounts for these CGUs were higher than their respective carrying amounts.

Recoverable Amount

The Group determines the recoverable amount of its primary CGUs on the basis of value in use and employing a DCF model, which reflects the specifics of the banking business and its regulatory environment. The model calculates the present value of the estimated future earnings that are distributable to shareholders after fulfilling the respective regulatory capital requirements.

The DCF model uses earnings projections and respective capitalization assumptions (with a Core Tier 1 ratio increasing to 10 %) based on five-year financial plans agreed by management and are discounted to their present value. Estimating future earnings and capital requirements involves judgment and the consideration of past and current performances as well as expected developments in the respective markets, and in the overall macroeconomic and regulatory environments. Earnings projections beyond the initial five-year period are, where applicable, adjusted to derive a sustainable level and are, in case of a going concern, assumed to increase by or converge towards a constant long-term growth rate of 3.6 % (2011: 3.6 %). This is based on expectations for the development of gross domestic product and inflation, and are captured in the terminal value.

Key Assumptions and Sensitivities

Key Assumptions: The value in use of a CGU is sensitive to the earnings projections, to the discount rate applied and, to a much lesser extent, to the long-term growth rate. The discount rates applied have been determined based on the capital asset pricing model and comprise a risk-free interest rate, a market risk premium and a factor covering the systematic market risk (beta factor). The values for the risk-free interest rate, the market risk premium and the beta factors are determined using external sources of information. CGU-specific beta factors are determined based on a respective group of peer companies. Variations in all of these components might impact the calculation of the discount rates.

Primary cash-generating units

 

Discount rate (pre-tax, determined implicitly based on post-tax rates)

 

2012

2011

N/M – Not meaningful

1

Respective pre-tax discount rates were in 2012 for AWM in old structure 12.7 % (2011: 12.5 %) and for PWM in old structure 12.1 % (2011: 11.9 %).

2

Comprises of two primary CGUs: NCOU Wholesale Assets (13.7 %) and NCOU Operating Assets (15.8 %). Stated pre-tax discount rates assume worst case post-tax valuation scenarios, whereas both CGUs are valued applying identical post-tax discount rates. Varying pre-tax rates are due to different cash-flow composition and pattern.

Corporate Banking & Securities

15.4 %

14.3 %

Global Transaction Banking

12.6 %

12.1 %

Asset & Wealth Management

12.7 %

N/M1

Private & Business Clients

14.8 %

13.5 %

Non-Core Operations Unit2

13.7 %/15.8 %

N/M

Primary cash-generating unit

Description of key assumptions

Management’s approach to determining the values assigned to key assumptions

Uncertainty associated with key assumptions and potential events/circumstances that could have a negative effect

Corporate Banking & Securities

  • Reap benefits from efficiency and cost reduction program announced and launched in 2012
  • Capitalize on synergies with other areas of the organization
  • Focus on client flows and solutions, benefiting from leading client market shares and higher customer penetration
  • Corporate Finance fee pools and Sales & Trading revenue pools increase slowly, as volatility recedes and economic growth stabilizes
  • Sustained asset efficiency under new regulatory framework and rigorously managed risk exposure
  • Continued targeted risk reductions and execution of management action to mitigate the impact of regulatory change
  • The key assumptions have been based on a combination of internal and external studies (consulting firms, research)
  • Management estimates concerning efficiency and cost reduction program based on progress made to date across various initiatives
  • Potentially weaker macroeconomic environment due to protracted sovereign debt crisis and potential contagion risk leading to slowdown in activity and reduced investor appetite
  • Structure and content of a range of regulatory changes being drafted in various jurisdictions could have a more severe impact than anticipated
  • Potential margin compression and increased competition in products with lower capital requirements beyond expected levels
  • Outcome of litigation cases
  • Cost savings and expected benefits from Group-wide Operational Excellence Program (OpEx) are not realized as anticipated
  • Delay in execution of risk mitigation strategies

Global Transaction Banking

  • Cost savings in light of Group-wide OpEx
  • Capitalize on synergies resulting from closer co-operation with other areas of the bank
  • Moderate macroeconomic recovery
  • Persisting low interest rate levels
  • Positive development of international trade volumes, cross-border payments and corporate actions
  • Deepening relationships with Complex Corporates and Institutional Clients in existing regions while pushing further growth in Emerging Markets
  • Successful turn-around of the commercial banking activities in the Netherlands
  • The key assumptions have been based on a combination of internal and external sources
  • Macroeconomic trends are supported by studies while internal plans and impact from efficiency initiatives have been based on management assumptions
  • Slowdown of the world economy and continued sovereign debt crisis and its impact on trade volumes, interest rates and foreign exchange rates
  • Unfavorable margin development and adverse competition levels in key markets and products beyond expected levels
  • Uncertainty around regulation and its potential implications not yet anticipated
  • Cost savings in light of Group-wide OpEx do not materialize as anticipated
  • Outcome of potential legal matters
  • Benefits from the turn-around measures of the commercial banking activities in the Netherlands are not realized as expected

Asset & Wealth Management

  • Cost savings in light of Group-wide OpEx and AWM platform optimization from merger of AM, PWM and Passive CB&S to form AWM
  • Expanding business with ultra high net worth clients
  • Building out the alternatives and passive/ETF businesses
  • Home market leadership in Germany through PWM and DWS
  • Strong coverage of emerging markets
  • Organic growth strategy in Asia/Pacific and Americas as well as intensified co-operation with CB&S and GTB
  • Maintained or increased market share in the fragmented competitive environment
  • AWM’s overall internal strategy continuously driven by

    • Wealth creation and activation,
    • Growth of the retirement market,
    • Insurance outsourcing,
    • New packaging innovation,
    • Institutionalization of alternatives,
    • Separation of alpha and beta,
    • Climate Change and sustainable investing
  • The key assumptions have been based on a combination of internal and external sources
  • Macroeconomic data and market data based on DB Research forecasts
  • Management estimates concerning AWM integration and cost reduction program based on progress made to date across various initiatives and review of duplication
  • Major industry threats, i.e. market volatility, European sovereign debt crisis, increasing costs from regulatory changes
  • Investors continue to hold assets out of the markets, retreat to cash or simpler, lower fee products
  • Business/execution risks, i.e. under achievement of 2013 net new money targets if European sovereign debt crisis affects Deutsche Bank’s stability, loss of high quality relationship managers
  • Difficulties in executing organic growth strategies through certain restrictions, e.g. unable to hire relationship managers
  • Cost savings following efficiency gains and expected IT/process improvements are not achieved to the extent planned
  • Uncertainty around regulation and its potential implications not yet anticipated
  • Potential impact from strategic review of certain parts of the business

Private & Business Clients

  • Cost savings in light of Group-wide OpEx
  • Leading position in home market Germany, strong position in other European markets and growth options in key Asian countries
  • Achievement of synergies between Deutsche Bank and Postbank on the revenue and the cost side
  • Market share gains in Germany using the strong advisory proposition
  • Leveraging stake in and cooperation with Hua Xia Bank in China and further organic growth in India
  • The key assumptions have been based on a combination of internal and external sources
  • All assumptions regarding PBC’s future development are supported by respective projects and initiatives
  • All initiatives were based on a business case developed by management validated by internal and external data
  • Significant economic decline potentially resulting in higher unemployment rates, increasing credit loss provisions and lower business growth
  • Continued low interest rates
  • Synergies related to Postbank acquisition are not realized or are realized later than foreseen
  • Costs to achieve the synergies are higher than foreseen

Non-Core Operations Unit Wholesale Assets

  • Continued execution of successful de-risking program
  • Continued capitalization of other divisions sales and distribution networks to facilitate successful de-risking program
  • The key assumptions have been based on a combination of internal and external studies (consulting firms, research)
  • Management estimates concerning the timing and quantum of disposal costs
  • Potentially weaker macroeconomic environment due to protracted sovereign debt crisis and potential contagion risk leading to slowdown in activity and reduced ability to de-risk at an economically viable level
  • Structure and content of a range of regulatory changes being drafted in various jurisdictions could have a more severe impact than anticipated
  • Outcome of litigation cases

Non-Core Operations Unit Operating Assets

  • Continued efforts to improve the underlying performance of operating assets in preparation for eventual sale
  • The key assumptions have been based on a combination of internal and external studies (consulting firms, research)
  • Management estimates concerning the timing and quantum of future sale of operating assets
  • Potentially weaker macroeconomic environment due to protracted sovereign debt crisis and potential contagion risk leading to slowdown in activity and reduced ability to dispose of operating assets at an economically viable level
  • Outcome of litigation cases

Sensitivities: In validating the value in use determined for the CGUs, certain external factors as well as the major value drivers of each CGU are reviewed regularly. Throughout 2012, share prices of banking stocks continued to be volatile, suffering from the pronounced uncertainty of market participants. In this environment, Deutsche Bank’s market capitalization remained below book value. In order to test the resilience of the value in use, key assumptions used in the DCF model (for example, the discount rate and the earnings projections) are sensitized. Management believes that the only CGUs where reasonable possible changes in key assumptions could cause an impairment loss in new structure were CB&S and PBC, for which the recoverable amount exceeded the respective carrying amount by 45 % or € 9.1 billion (CB&S) and 21 % or € 2.9 billion (PBC).

Change in certain key assumptions to cause the recoverable to equal the carrying amount

Change in Key Assumptions

CB&S

PBC

N/M – Not meaningful

1

A rate of 0 % would still lead to a recoverable amount in excess of the carrying amount.

Discount rate (post tax) increase from/to

11.1 %/13.7 %

10.8 %/12.1 %

Projected future earnings in each period

(21) %

(13) %

Long term growth rates

N/M1

N/M1

The recoverable amounts of all remaining primary CGUs were substantially in excess of their respective carrying amounts. A triggering event review as of December 31, 2012 confirmed that there was no indication that the remaining goodwill of the primary CGUs might be impaired.

However, certain political or global risks for the banking industry such as a further escalation of the European sovereign debt crisis, uncertainties regarding the implementation of already adopted regulation and the introduction of legislation that is already under discussion as well as a prospective slowdown of GDP growth may negatively impact the performance forecasts of certain of the Group’s CGUs and, thus, could result in an impairment of goodwill in the future.